Couple hikingWhen is the best time to start taking Social Security benefits? The answer is not always so simple. Perhaps this article with provide some things to think about as you ponder your choices. 

Myth No. 1:  If you wait, you get more…

The older you are when you start, the more Social Security monthly income you receive. The Social Security Administration thus entices people to wait longer. But let’s look at this a little deeper.

Let’s use an example. Assume at age 62 a person’s Social Security monthly income will be $1,000 per month. However, if they wait until age 67, this monthly income increases to $1,500. More is better, right?

Remember that in order to get this extra $500 per month, this individual had to wait five years. So if we calculate the income this person did not receive, it comes out to $60,000 ($1,000 per month for five years).

The proper thing to do in this example is analyze the pros and cons of waiting five years for the extra $500 per month.

Using the example, the pros are simple. Waiting earns you an extra $500 per month, which is a good thing.

Now let’s take a look at the cons. How many months does it take someone to simply break even (from a financial perspective)? Well, if you divide $60,000 (lost income) by the $500 (additional income), it comes out to 10 years.

However, the story does not end here. Remember, by waiting five years this person is now 67 years old. Therefore, in order to accurately calculate the lost income and “break-even” point, you also have to add in the five years this person waited (from age 62–67). Therefore, it really takes this person 15 years to simply break even and justify deferring their Social Security income.

But wait, there’s more …

Some other key factors to consider are:

  • Five years of potential lost interest or growth from the monthly income
  • Five years of lost ability to spend and enjoy the extra monthly income
  • Countless years of lost income due to a possible critical illness
  • Countless years of lost income due to a possible premature death
  • Countless years of lost income due to an unexpected illness or death of a spouse
  • Countless years of reduced purchasing power as a result of inflation
  • Countless years of lost income due to the potential for taxes to go higher
  • Countless years of lost income due to potential reductions, changes, or even the elimination of Social Security income

Myth No. 2:  My income and taxes will be lower in retirement…

Far too often individuals/couples make major mistakes as a result of basing a financial decision upon its tax consequences.

Most of us have heard the argument, “I will be in a lower tax bracket when I retire.” This statement seems to be an amazement for several reasons.

First, why do so many aspire to have a significant income reduction once they reach retirement? Retirement is commonly referred to as the Golden Years, right? This implies that you worked hard and long enough to have saved enough gold to live like Kings and Queens.

Second, when are you more likely to spend more money: While you are working or when you are on vacation? Since the obvious answer is while on vacation, isn’t it fair to say that retirement is supposed to be a wonderful, long, enjoyable vacation from work? Retirement is arguably the time when you have earned the right to spend and enjoy your hard-earned wealth and income.

Yes, more income does mean more taxes, indisputably. However, here is a theory on taxes: Make a lot of money, pay a lot of taxes, and repeat the process.

Again, let’s again analyze the pros and cons.

The main pro for deferring Social Security income is simple. More income means more taxes, and nobody likes paying more taxes.

Now, let’s take a look at the cons using an example:

In 2012, Couple No. 1 earns $50,000 per year. Couple No. 2 earns $500,000 per year.

Couple No. 1 paid less in Federal taxes (15 percent) than the couple earning $500,000 per year (35 percent). In fact, on the surface (excluding any deductions and State income taxes) Couple No. 1 paid a mere $7,500 in taxes, while Couple No. 2 paid a whopping $175,000 in taxes.

However, which of the following retired couples would you rather be:

Couple No. 1: Net Income (after taxes) is $42,500 per year, or $3,542 per month. Couple No. 2: Net Income (after taxes) is $325,000 per year, or $27,083 per month.

But wait, there’s more …

Some other key factors to consider are:

  • Today we are in the sixth lowest tax bracket in history
  • A large majority of people today believe tax rates are going higher
  • There are many reasons a person’s (or couple’s) taxable income can actually increase in retirement (employment income, asset and income growth, inheritances, spouse’s death and rental income, IRA Required Minimum Distributions, loss of deductions, and more).

A bird in the hand

When it comes to determining the right time to take Social Security income, too many individuals and couples conclude it’s in their best interest to delay beginning to take Social Security income so as to increase their future income and/or minimize their income tax.